The national policy of deinstitutionalization has reduced the census of public mental hospital by 70% during the past 25 years, but has raised considerable professional and public concern about adverse effects on the chronically mentally ill, their families, and communities. During the same time, the costs of mental health care have spiraled, and approximately 80% of these costs are attributable to chronic mental illness, largely related to expense of inpatient care. Therefore, a policy that promotes the widespread delivery of effective, economical, community-oriented mental health care to persons with chronic mental illnesses remains elusive. System-wide interventions are needed that improve services and can be generalized to other areas of the nation. One approach which has been proposed is the creation of new financial incentives for community mental health care providers to assume greater responsibility for the treatment of these chronic patients. In the proposed study, the clinical impact of a prepaid capitation payment system for chronic mental patients will be evaluated. This Capitation Payment System (CPS), part of the Monroe/Livingston County (N.Y.) Demonstration Project, creates financial incentives for community mental health centers to assume clinical responsibility for chronic mental patients, to develop new programs for them in the community, and to reduce the heavy use of inpatient services at a state hospital. If successful, this approach may be applicable to other locales. In an experimental clinical trial with pre-randomization of eligible patients, approximately 625 chronically mentally ill patients, stratified according to their recent utilization of state hospital inpatient services, will be randomized to an experimental or control group. The experimental patients will be eligible for CPS-enrollment by community mental health centers and the control patients will continue to receive care as currently available under fee-for-service or deficit reimbursement funding. All patient groups will be evaluated at baseline and at 6-month intervals for two years to assess the impact of CPS on patients' symptomatology, functional status, quality of life, burden on families, and utilization of mental health services. This clinical information will also be integrated with administrative and financial data, collected under the Demonstration Project, to conduct a cost-benefit analysis.